Europe Politics

UK awaits new prime minister — and he'll have to confront Brexit chaos very quickly

Key Points
  • The U.K. will find out who its next prime minister on Tuesday after a weeks-long Conservative Party leadership contest.
  • Monday was the last day that members of the Conservative Party could submit their preferred candidate to lead the party.
  • Former Foreign Minister Boris Johnson is expected to win the leadership race ahead of current Foreign Minister Jeremy Hunt.
Boris Johnson (L) and Jeremy Hunt take part in the Jeremy Hunt and Boris Johnson debate Head To Head on ITV on July 9, 2019 in Salford, England.
Handout | Getty Images News | Getty Images

The U.K. will find out who its next prime minister will be on Tuesday when the winner of the ruling Conservative Party's leadership race is announced.

Monday was the last day that members of the party could submit their preferred candidate to lead the party, and the country, with former Foreign Minister Boris Johnson facing the current holder of that post Jeremy Hunt.

Johnson, who is known for his outspoken and often controversial views, is the frontrunner in the leadership contest. Sterling edged 0.3% lower against the U.S. dollar Tuesday morning, slipping to $1.2437. The result will be announced around 11a.m. London time.

The vote comes after Prime Minister Theresa May announced she would resign following repeated parliamentary rejections of the Brexit deal she struck with the EU.

As such, the party leadership race has focused on how each contender would deal with Brexit ahead of a new departure deadline of October 31.

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Pro-Brexit candidate Johnson has already caused a stir by saying that the U.K. must leave the EU by the deadline "do or die, come what may" even if that meant leaving without a deal in place. His opponent Hunt, a "Remainer" in the initial 2016 referendum who has since said he would now vote to leave, has also been vociferous about fulfilling Brexit but said no deal was a last resort and that he was prepared to further delay Brexit in order to get a deal.

A "no-deal" Brexit is seen by many inside and outside of parliament as a "cliff-edge" scenario to be avoided at all costs.

Leaving without a deal in place would mean an abrupt departure from the EU with no transition period which would have allowed businesses to adjust to life outside the trading bloc. It would also mean that the U.K. has to revert to World Trade Organization (WTO) rules and automatic import tariffs that could damage trade and consumption.

Many ardent Brexiteers are fed up with the delay, however, and believe that the U.K. should adhere to an already-extended deadline to leave the bloc. The EU has insisted many times that it is not open to renegotiating the deal it struck with May last year, raising the prospect of a no-deal exit.

Finance Minister Philip Hammond has already said he will resign on Wednesday and has strongly opposed a no-deal Brexit, telling CNBC last week that "if the new government tries to drive the U.K. over a cliff-edge called no-deal Brexit I will do all I can to stop that."

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Whichever man wins the race will have to see how the government's wafer-thin majority — only provided by a staunchly pro-Brexit party in Northern Ireland — lasts under his leadership. Northern Ireland, and its future relationship with the EU and position in the U.K., is one of the biggest stumbling blocks to a deal being approved.

On top of that, the leader will have to deal with a rebellious and divided parliament and a chasm in public opinion between the 52% who voted for Brexit, and the 48% that didn't (and all those in between that have since changed sides).

John Penrose, MP for Weston-super-Mare and minister of state to Northern Ireland, told CNBC's "Squawk Box Europe" Tuesday that whoever becomes the next prime minister, would "have to help the party heal and lead the country to heal."

"Those wounds from three years ago — those are still there. We can't carry on like this, it's been three years we've got to get through it," he said.

UK 'almost uninvestable'

Uncertainty over Brexit has had a knock-on effect on the economy with many businesses holding back on investment until they know more about the future relationship the U.K. will have with the EU — its largest trading partner as a bloc.

Robust GDP (gross domestic product) growth of 0.5% in the first quarter was seen as down to an uptick in production and stockpiling of goods and components before an original Brexit date of March 29. But second-quarter GDP is set to reflect a wider malaise and hesitation over investment, largely caused by Brexit.

For one, Capital Economics' U.K. Economist Thomas Pugh issued a note earlier in July noting that "the economy probably just about contracted in Q2 (the second quarter) as a whole. Some of that is just payback from activity being brought forward from Q2 into Q1 ahead of the original Brexit deadline of 29th March. But there's a growing risk that the underlying trend is slowing too."

Sterling has also weakened almost 4% against the dollar in the last three months. Some investors are very nervous about the U.K.'s near and long-term economic future while others are more confident the U.K. will be able to recover, eventually.

"We think the U.K. is almost uninvestable until we have much better clarity about what's going to happen going forward," Paul Gambles, co-founder of the MBMG Group, told CNBC's "Squawk Box Europe" Monday.

"It's (the pound) not at bargain basement levels yet, we'd need to see the pound dipping to $1.20 or below that," he said. "We're not seeing any end to the weak pound scenario unless something changes dramatically."

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Tapan Datta, the head of global asset allocation at Aon, was more sanguine on U.K. investment, saying "I think the opportunities are there providing you can take a view through this Brexit imbroglio."

"If you're working on the idea that somehow a deal can be arrived at over the next 6 to 12 months — though it doesn't look like it's going to happen by October, frankly — there are certain parts of the U.K. equity market that look really deep value at present," he noted, saying more domestically-sensitive cyclical stocks (whose performance typically follows economic trends) that "had been beaten up" during Brexit negotiations were an example of potential value.

"You can arguably take a view on sterling too because at $1.24/$1.25 is low, and arguably significantly under-valued. So if you're prepared to take that view, you might lose a bit of money near-term, but if you're prepared to sit it out for a couple of years you could be sitting on a 10% plus gain," he told CNBC's "Squawk Box Europe" Monday.

"So, I would disagree that the U.K. is uninvestable, it's just that the near-term uncertainties are very considerable."

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